Liquidity is how easily a business can meet its short-term obligations and convert assets to cash without loss, a core measure of financial health.
Liquidity describes both the ease of turning an asset into cash and a business's ability to pay its near-term bills. Cash is perfectly liquid; receivables and marketable securities are highly liquid; inventory and equipment are less so. A liquid business can cover payroll, suppliers and tax remittances as they fall due.
Liquidity is measured with tools like the current ratio, quick ratio and working capital, and monitored through cash flow. A profitable business can still fail if it is illiquid, unable to access cash when obligations come due, which is why liquidity is watched as closely as profitability.
A company shows a healthy profit but has tied up its cash in inventory and slow receivables. When payroll and a tax remittance fall due the same week, its poor liquidity leaves it scrambling for cash despite being profitable.
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